Foreign Influence Growing in Telecom Sector

Foreign investors are exercising greater influence in the domestic telecommunications market, reflecting the effect of globalization on Korea, while some government officials are worrying over the blurred identity of telecom outfits.

Over the past years, the Korean government and regulators embraced international standards for the telecom market, taking deregulatory measures and setting an example for other countries.

The foreign ownership ceiling for telecom companies in Korea is now set at 49 percent, a result of the deregulatory measures by the government. KT Corp., formerly Korea Telecom, has been fully privatized, despite the fact that its sprawling fixed-line telecom infrastructure that covers the entire nation has not only market value but also strategic and security functions.

While Korea has remained relatively faithful to deregulation-oriented policies for the telecom industry and privatized the country`s state-run telecom giant, other countries are yet to liberalize their markets, creating a global imbalance.

Government sources said foreign investors are now playing greater roles in the management of major telecom outfits like KT, SK Telecom and Hanaro Telecom Inc.

However, regulators are now worried that major firms would be vulnerable to hostile take-over bids, if the foreign ownership ceiling is fully lifted. The United States and the European Union are expected to put pressure on the Korean government to lift the ceiling, something that could completely transform the domestic market.

Hanaro is set to hold a board meeting today to decide on a financing proposal by a foreign consortium that includes AIG and Newbridge Capital. The proposal, worth $450 million, is intended to infuse fresh funds into the firm in exchange for a 39 percent stake, though the LG Group made a sort of a counter offer Tuesday, saying it is willing to take over Hanaro completely to beef up its own telecom operations.

But the bigger issue is that the AIG-Newbridge consortium is demanding key posts such as the chief executive and chief financial officers, while seeking to dominate the board in a bid to fully capture managerial control.

Given that Hanaro is simply trying to attract fresh funds to grapple with its poor financial conditions, the foreign consortium`s demand is viewed as a sign that foreign investors want more than simple investment.

The AIG-Newbridge consortium is also rumored to be interested in taking over other cash-strapped telecom firms like Korea Thrunet Co. and Onse Telecom. If this scenario materializes, the foreign consortium could, at least theoretically, control about 45 percent of Korea`s broadband market in return for just 500 billion won ($421 million) in investment.

SK Telecom, the country`s largest mobile carrier, is in trouble as well. Sovereign Asset management, a foreign investment fund, controls a 14.99 percent stake in SK Corp., the largest shareholder of SK Telecom. If the fund increases its stake to 15 percent, SK Telecom`s business management could face serious interference.

Sovereign could exercise its influence for not only SK Corp. but also SK Telecom, thanks to its subtle move to maintain a strategic stake in SK Corp.

Additionally, under the current laws, no foreign investor should be able to become the largest shareholder of KT, but a U.S.-based fund already emerged as the largest shareholder as of Jan. 6 in violation of the domestic regulations.

The Ministry of Information and Communication is now reviewing the stake ownership issue for KT.

In fact, the Information Ministry and other government agencies did not fully consider and debate the issue of whether the country`s strategic telecom infrastructure should be completely liberalized, even though KT`s equipment and facilities largely serve the public interest.